CA Pankaj G. Shah
It has become a normal tendency to subject an Assessee to Penalty u/s 271(1)(c) in all cases where the Assessee refrains to file an appeal, with a hope to end the nightmare which began with selection of case for scrutiny by accepting the general additions in Assessment order. The peace and content that he will not have to face any unintended enhancement from a forum approached for justice in Appeal is not long lasting as then comes the show cause notice for penalty. Penalty is straightaway levied merely because no appeal has been filed against the quantum order is not a new phenomenon in the Department. It is only the judiciary which can check this misuse of power and blind folded practice though after going through the process of long drawn litigation which was sought to be avoided at the first instance by not filing an appeal.
Why an Appeal against the quantum order is not filed by the Assessee if he is confident that there is no wrong doing, no concealment, no evasion? This question has been rightly answered by none other than Supreme Court in case of Sir Shadilal Sugar Mills (168 ITR 7051) holding that there may be a hundred and one reasons for no protesting and agreeing to an addition but that does not follow to the conclusion that the amount agreed to be added was concealed income. Indeed, there may be numerous reasons with the tax payer for not approaching the first appellate authority for justice, for example the following:
Having said that, what is the defense available against the penal weapon of destruction? The Answer is by first bringing awareness in the fraternity on the law that exists in form of judicial pronouncements and further by taking this light of pronouncements in our reply to penalty notices.
First reliance should be placed on the decision of Hon’ble Karnataka High Court in case of CIT v. Manjunatha Cotton & Ginning Factory (2013 35 taxmann.com 250) where the High Court categorically held that
“The imposition of penalty is not automatic, i.e., imposition of penalty even if the tax liability is admitted, is not automatic. Even if the assessee has not challenged the order of assessment levying tax and interest and has paid the same, that by itself would not be sufficient for the authorities either to initiate penalty proceedings or impose penalty, unless it is discernible from the assessment order that, it is on account of such unearthing or enquiry concluded by authorities which has resulted in payment of such tax or such tax liability came to be admitted, and if not, it would have escaped from tax net as opined by the Assessing Officer in the assessment order. ……… [Para 63]”
……………..The very fact that the assessee agreed to pay tax and did not challenge the assessment order, cannot be construed as mala fide. Therefore, the Tribunal was justified in setting aside the orders passed by the Appellate Authority as well as the Assessing Authority. [Para 64]
This decision squarely addresses to a situation where penalty is sought to be levied merely for not filing an appeal against quantum order. After the decision of Apex Court in Dharmendra Textiles it is presumed by the Department that in every case where addition is made, penalty is a sine-qua-non. Now where appeal is filed before CIT(A) a shield is impressed upon the Assessee by virtue of Section 275 of the Act requiring the penalty to be kept in abeyance till outcome of appeal. However where the protection is not available due to non filing of appeal, we inevitably witness stereo-type penalty orders with reference and reliance by Department on the decision in case of Dharmendra Textiles, without even appreciating that the judgement was not in context of Income tax law and considering the correct interpretation of that judgement by numerous tribunals and High Courts. In such a situation, the aforesaid decision of High Court may come to some rescue to the much harassed Assessee. Some more direct decisions are given hereunder to equip the professionals with legal armor.
In the case of Rai Industrial Power Pvt. Ltd. Vs DCIT (ITA 4862/Del/2013), Delhi Bench of ITAT held that simply because the additions made were not challenged by the Assessee this fact by itself is not a good enough reason to confirm or impose penalty. It also held that there can be many reasons which may prevail on the mind of an Assessee on account of which the Assessee may not challenge the additions in a certain year and the mere fact of accepting the additions ipso facto does not lead to the conclusion that the Assessee has nothing to say.
In context of Section 68 where Cash credits are added, it is presumed to be a fit case for penalty and when there is no appeal by Assessee the case of concealment by the Department is fortified. For Assessee’s entangled in similar situations the decision of Hyderabad Tribunal in case of Kalpalatha v. ACIT (66 TAXMAN 111 (HYD.)) may bring some relief. It was categorically held that
“It was, no doubt, true that the assessee did not go in appeal against the aforesaid addition made in the assessment proceedings on the ground that it represented a cash credit which was not proved to be genuine. But the fact remained that the assessee did not admit the amount in question to be representing the amount concealed income.”
In an another decision by Ahmedabad Bench of ITAT reported as Yogeshkumar Chhotalal Shah vs. ITO ((2013) 36 CCH 003 (Ahd), there were addition u/s 68 of the Act was made in respect of unsecured loans taken in cash and the evidences of Assessee were not accepted by the department. Since no appeal was preferred against quantum, expectantly penalty was followed with. On such facts even though no appeal was filed against the quantum order, penalty was deleted by the Tribunal holding that If Assessee gives an explanation which is unproved but not disproved, i.e., it is not accepted but circumstances do not lead to reasonable and positive inference that assessee’s case is false, explanation cannot help Department because there will be no material to show that amount in question was income of assessee. It was also held that No penalty can be imposed if the facts and circumstances are equally consistent with the hypothesis that the amount does not represent concealed income with the hypothesis that it does.
Similar views have been taken in following precedents:
It is interesting to note that wayback in year 1972, Hon’ble Supreme Court in the case of Hindustan Steel Ltd. v. State of Orissa 83 ITR 26 had laid down the correct position of law by holding that the Assessing Officer is not bound to levy penalty automatically simply because the quantum addition has been sustained. Also in case of CIT v. Khoday Eswara (83 ITR 369)(SC) incidentally reported in same ITR Volume, it is held that Penalty cannot be levied solely on basis of reasons given in original order of assessment. Supreme Court has recently reiterated the law in case of Dilip N. Shroff v. Jt. CIT  291 ITR 519 by holding in para 62 that finding in assessment proceedings cannot automatically be adopted in penalty proceedings and the authorities have to consider the matter afresh from different angle. These old but gold decisions should again be brought to the notice of the Authorities who have assumed penalty as another kind of compulsory tax after Assessment.
It may be noted that even a new plea can be taken at the time of Penalty proceedings in respect of quantum matter, which was in fact not taken during the Assessment proceedings. Allahabad High Court in case of Jaidayal Pyarelal v. CIT 1973 Tax LR 880 has held that the regular assessment order is not a final word upon the plea taken therein or which might have been taken at this stage. The Assessee is entitled to show cause in penalty proceedings and to establish by the material and relevant facts which may go to affect his liability or the quantum of penalty. He cannot be held to be debarred from taking appropriate plea simply on the ground that such a plea was not taken in the regular assessment proceedings.
In view of above, it is clear that neither the Assessment order is final and makes automatic way for penalty nor the non-filing of appeal causes any prejudice to Assessee’s case in penalty or debars from contending the debatable nature of his claim and bonafide.
I hope this Article may prove useful to the professionals but would like to caution that the facts of each case are the most relevant factor in deciding the fate of each case and must be thoroughly studied and presented, though the role of case laws in the reply must be in the like manner as an icing on the cake.
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